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1.

Syarikat Comfortlife Sdn Bhd

(a) Discuss whether Eunos, Alan and Bernard have any duty to disclose their interests in
the Impressive Living and Qualitas contracts. Can they take part in the discussion or voting
of these contracts?

Introduction

The question requires discussion on the following:

• Whether Eunos has a duty to disclose his interests in a proposed contract between
Comfortlife and Impressive Living.

• Whether Alan and Bernard, being directors of Qualitas, have a duty to disclose their
interests in a proposed contract between Comfortlife and Qualitas.

Explanation on section 221 Companies Act 2016

• Under section 221(1) Companies Act 2016, a director who is directly or indirectly
interested in a contract or proposed contract with his company shall, as soon as practicable
after the relevant facts have come to his knowledge, declare the nature of his interest at a
meeting of the directors/BOD meeting of the company.

• Section 221(2) provides that s.221(1) shall not apply where the director’s interest consists
of only being a member or creditor of a corporation which is interested in a proposed
contract with his company, if his interests is not a material interest.

• Section 221(3) provides that a director shall not be deemed to be interested in any
proposed contract by reason only that he is a guarantor for any loan to the company; or he
is a director of a related corporation that is entering into a proposed contract with his
company.

• Under section 221(9), an interest of the spouse or child of the director (not being herself or
himself a director of the company) in the shares or debentures of the company, shall be
treated as an interest in the proposed contract.

Thus, where a director’s spouse or child has interest in the shares of the other contracting
party, the director is also deemed to have interest in the proposed contract and should
declare the interest.

• Where a proposed contract is entered into in contravention of s.221, the proposed


contract shall be voidable at the instance of the company except if it is in favour of any
person dealing with the company for any valuable consideration and without actual notice
of the contravention – s.221(10) – Consequences.

Penalty: Imprisonment not exceeding 5 years or fine not exceeding RM3 million or both –
s.221(12).

Explanation on section 222 Companies Act 2016

• Under section 222(1), a director who is directly or indirectly interested in a contract or


proposed contract with his company shall be counted only to make the quorum at the board
meeting, but shall not participate in any discussion while the contract is being considered at
the board meeting, and shall not vote on the proposed contract. (no need mention “unless”)
• Under s.222(2), the interested director may attend the board meeting, participate in the
discussion and vote on the proposed contract in the following situations: / s.222(1) shall not
apply where:

(a) the company is a private company, unless it is a subsidiary to a public company;

(b) the company is a private company which is a wholly-owned subsidiary of a public


company, and the proposed contract is between the private company and the holding
company or another wholly-owned subsidiary of the same holding company;

(c) the proposed contract is a contract of indemnity against any loss which any director may
suffer because he is a surety for the company; or

(d) the proposed contract is to be entered into by a public or private company which is a
subsidiary of a public company, with another company in which the director’s interest
consists solely of qualification shares or not more than 5% of its paid-up capital.

• Where a proposed contract is entered into in contravention of s.222, the proposed


contract shall be voidable at the instance of the company except if it is in favour of any
person dealing with the company for any valuable consideration and without actual notice
of the contravention – s.222(3) - Consequence.

Penalty: Imprisonment not exceeding 5 years or fine not exceeding RM3 million or both –
s.222(4).

Apply the law to the facts and conclusion

• On the facts, Eunos’ wife, Hamidah held 10% of the shares in Impressive Living.

• Applying s.221(9), Eunos is also deemed to have interest in the proposed contract and he
should declare his interest.

• Alan and Bernard are directors of Qualitas, which is the subsidiary Co of Comfortlife.

• They are not deemed to be interested in any proposed contract, because Section 221(3)
provides that a director shall not be deemed to be interested in any proposed contract by
reason only that he is a director of a related corporation that is entering into a proposed
contract with his company.

• Comfortlife and Impressive Living are private company.

• Therefore, applying s.222(2)(a),

• Eunos can still attend the board meeting, participate in the discussion and vote on the
proposed contract.

• Eunos only just came to know that day (1.3.2018) about his interest in the Impressive
Living contract. He must make the relevant disclosures as soon as practicable after the
relevant facts have come to his knowledge, at a BOD meeting of the company.

• Declare as soon as practicable after relevant facts have come to his knowledge

• Declare his interest at Board meeting

• So the matter cannot be discussed now, it can only be discussed after Eunos has complied
with the relevant disclosure procedures in in s.221(6) to (8).
(b) Discuss whether Comfortlife’s board may enter into the Kwazai and BMW contracts.

Note:

• In most previous exam papers, only one situation will come out, e.g. Kwazai contract
only, or BMW contract only.

• The tutorial question is to provide training to students to answer questions on s.223 and
s.228, hence the answer is a bit long.

• Divide your answers into 2 major sub-headings – Kwazai contract and BMW contract.

DISCUSSION ON THE KWAZAI CONTRACT

Introduction

• The question calls for discussion on whether Comfortlife may contravene s.223 in relation
to the Kwazai contract, i.e. acquisition of a property of a substantial value.

• s.223 applies to acquisition of property from a person who is not a director, substantial
shareholder or person connected. (to justify why you are not discussing s.228).

Explanation of Section 223

• Under s.223(1) Companies Act 2016, a company cannot enter into any arrangement or
transaction for:

- The acquisition of an undertaking or property of a substantial value - s.223(1)(a) or

- disposal of a substantial portion of the Company’s undertaking or property - s.223(1)(b),

- unless the arrangement or transaction has been approved by the Company in a general
meeting - s.223(1)(b)(i)&(ii)

• The company’s undertaking or property is considered “substantial value” or “substantial


portion” if:

- its value exceeds 25% of the company’s total assets, - s.223(3)(a) or

- the net profits (after deducting all expenses except taxation and extra-ordinary items) from
the undertaking/property amount to more than 25% of the company’s total net profit, -
s.223(3)(b) or

- its value exceeds 25% of the company’s issued share capital. - s.223(3)(c)

***The highest value shall be taken into account.

• The board of directors have no power to enter into such the transaction unless the
transaction has been approved by members’ ordinary resolution.

• Where the company is a subsidiary of a listed company, the approval of the listed holding
company’s members must also be obtained. - s.223(2)(c) (ignored bcs not subsidiary of Publc
Co)

• The consequences of contravention:

• Under s.223(4), if s.223 is contravened, any member may apply to court to restrain
the company from entering into or carrying into effect the void transaction.
• Under s.223(5), if s.223 is contravened, the arrangement or transaction is VOID
except in favour of any person dealing for valuable consideration and without actual
notice of the contravention.

• Under s.223(7), any director who contravenes s.223 shall be guilty of an offence.

Penalty: Imprisonment not exceeding 5 years or fine not exceeding RM3 million or
both.

• “Director” means any director, de facto/shadow director, alternate director, Chief


Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (CFO) or senior
members of the management team.

• Under s.223(6), s.223 does not apply to:

a. disposal of whole/substantially the whole of Co’s undertaking/property by a


Receiver and Manager appointed under an instrument or appointed by Court

b. disposal by a Liquidator appointed in a voluntary winding up

Application of law to the facts

• On the facts, Kwazai is not a director, substantial shareholder or a person connected to a


director/substantial shareholder of Comfortlife. It is not related to Comfortlife.

• How much do the two MPVs cost? RM350,000/-

• What was the Co’s issued share capital? paid up capital is RM2 million

• What was the Co’s total asset? Question no mentioned

• What was the Co’s total net profits? Question no mentioned

• What was the Co’s net asset value? NOT RELEVANT, relevant to s228 when between
RM50,000/- to RM250,000/- and it exceeds 10% of the co’s net asset value

• How many percentage over the Co’s net asset value? NOT RELEVANT

• Does the value of the transaction exceeds 25%? No, bcs 17.5%(350k/2mil)

• Is it considered of transaction of substantial value? no

• Does the acquisition of the MPVs fall within any of the exceptions in s.223? no s.223(6)

• Is prior approval by way of members’ ordinary resolution required? no

• If the directors fail to obtain prior approval, the consequences are:

Apply s.223(4), (5) and (7). Mention the company or directors’ names where necessary.

Conclusion

• In conclusion, the board can enter into the Kwazai contract without prior approval of the
members.
DISCUSSION ON THE BMW CONTRACT

Introduction

• The question calls for discussion on whether Comfortlife may contravene s.228 Companies
Act in relation to the BMW contract.

s.228 applies to acquisition from a person who is a director, substantial shareholder or


person connected. (to justify why you are discussing s.228).

Explain “substantial shareholder” of the company or related company

• Section 136 CA 2016 provides that a person has a substantial shareholding in a company in
a company if he has interest in not less than 5% of the voting shares in the company or not
less than 5% of the voting shares in a class of shares where the company’s share capital is
divided into two or more classes.

Explain “person connected”

• Section 197(1) provides that a “person connected” is:

(a) a member of that director’s family;

(b) a body corporate which is associated with that director.

(c) a trustee of a trust (other than a trustee for an employee share scheme or pension
scheme) under which that director or a member of his family is a beneficiary; or

(d) a partner of that director; or a partner of a person connected with that director.

• Under s. 197(2)(a), a member of director’s family, as defined in “shall include spouse,


parent, child (including adopted and step-child), brother, sister and the spouse of his child,
brother or sister”.

• Under s.197(2)(b), a body corporate is associated with a director if:

(i) the body corporate is accustomed or is under an obligation, whether formal or informal,
or the majority of its directors is accustomed, to act in accordance with the director’s
directions, instructions or wishes;

(ii) that director has a controlling interest in the body corporate; or

(iii) that director or person connected with him or both of them together, control not less
than 20% of the voting shares in the body corporate.

Explanation of Section 228 and 229

Section 228 Companies Act 2016

• Under section 228(1) Companies Act 2016, a company shall not carry into effect any
arrangement or transaction where its director or substantial shareholder or a person
connected with such director or substantial shareholder:

(a) acquires or is to acquire shares or non-cash assets of the requisite value, from the
company, or
(b) disposes of or is to dispose of shares or non-cash assets of the requisite value, to the
company.

• Under section 228(8)(c), a non-cash asset is of the “requisite value” if, at the time of the
transaction:

- its value exceeds RM250,000/- or,

- if its value is between RM50,000/- to RM250,000/- and it exceeds 10% of the company's
net asset value (as determined from previous financial year’s audited accounts),

- provided it is not less than RM50,000/-. (unless the Co’s constitution requires it)

• Section 228(1)(A) and (B) prohibit such transaction unless the transaction is made subject
to the approval of the shareholders at a general meeting or the transaction has been
approved by shareholders at a general meeting.

• It is not sufficient for a private company to obtain the approval by a written resolution. A
meeting of members (EGM) must be held in order to vote on the transaction. (自己加)

• Where the contracting party is a director, substantial shareholder or person connected to


a director/substantial shareholder of a related company, the transaction must be approved
by members of both the company and the related company. - Section 228(2)(a)&(b).

• Where the company is a subsidiary of a listed company, the approval of the listed holding
company’s members must also be obtained. - Section 228(3). (Not apply, ignore)

• Section 228(4) provides that for a public company or its related company, the interested
party (i.e. the director, substantial shareholder or person connected) must abstain from
voting on the resolution. (Not apply, ignore)

• The approval must be obtained before the transaction is carried into effect, otherwise, the
transaction is void and cannot be enforced - Section 228(2).=consequence

• s.229 specifies a few transactions that are exempted from s.228, and the relevant ones for
discussion are:

(a) Where the transaction is entered into between a company and its wholly-owned
subsidiary;

(b) where the transaction is entered into between two companies which are the wholly
owned subsidiaries of the same holding company

(d) where the transaction is an arm’s length transaction, made in the company’s ordinary
course of business;

• The consequences of contravention:

• Under s.228(5), the director, substantial shareholder or person connected and any
director who knowingly authorized the arrangement or transaction shall be liable

(a) to account to the company for any gain which he had made from the
arrangement or transaction; and

(b) jointly and severally to indemnify the company for any loss or damage resulting
from the arrangement or transaction.
• Under s.228(6), any member or director may apply to court to restrain the
company from carrying into effect the void transaction

• Under s.228(7), the director, substantial shareholder, person connected or any


directors who knowingly authorized the company to carry out such transaction shall
be guilty of an offence.

Penalty: Imprisonment not exceeding five (5) years or fine not exceeding RM3
million or both.

Application of the law to the facts

• On the facts, Farouk holds 7.5% shares in Comfortlife. Thus, he is a substantial


shareholder.

• The value of the BMW is RM300,000. It is a non-cash asset of requisite value.

• Prior approval of the shareholders at a general meeting will be required.

• It is not sufficient for Comfortlife (Private Co) to obtain the approval by a written
resolution.

• A meeting of members(EGM) must be held in order to vote on the transaction.

• Farouk can attend the EGM, but cannot participate and vote on the resolution whether
or not to approve the transaction.

• The acquisition of the BMW does not fall within any of the exceptions in s.229.

• If the directors fail to obtain prior approval, the consequences are:

• Apply s.228(5), (6) and (7). Mention the company, Farouk or directors’ names where
necessary.

• Under s.228(5), the director, substantial shareholder or person connected and any
director who knowingly authorized the arrangement or transaction shall be liable

(a) to account to the company for any gain which he had made from the
arrangement or transaction; and

(b) jointly and severally to indemnify the company for any loss or damage resulting
from the arrangement or transaction.

• Under s.228(6), any member or director may apply to court to restrain the
company from carrying into effect the void transaction

• Under s.228(7), the director, substantial shareholder, person connected or any


directors who knowingly authorized the company to carry out such transaction shall
be guilty of an offence.

Penalty: Imprisonment not exceeding five (5) years or fine not exceeding RM3
million or both.

Conclusion

• In conclusion, the board cannot enter into the BMW contract without prior approval of the
shareholders at a general meeting.
2. Syarikat Sinar Jaya Sdn Bhd

Advise the company as to whether there are any restrictions under the Companies Act
2016 in relation to the above proposal and the consequences arising from the breach of
any of the provisions of the Act.

Note:

• In most previous exam papers, only one situation will come out, e.g.
loan/guarantee/security to Badrul only, or loan/guarantee/security to Fatimah only.

• The tutorial question is to provide training to students to answer questions on s.224 and
s.225, hence the answer is a bit long.

• Divide your answers into 2 major sub-headings – Director and Person Connected.

DISCUSSION ON FINANCIAL ASSISTANCE TO A DIRECTOR

Introduction

• The question requires a discussion on the prohibition under the s.224 Companies Act 2016
in relation to a company providing financial assistance to a director and the consequences of
breach.

Explanation on Section 224 Companies Act 2016

• Under s.224(1) Companies Act 2016, a company shall not:

(a) make a loan to a director of the company or related company;

(b) enter into any guarantee or provide any security in connection with a loan made to such
a director by any other person (e.g. a bank)

Exceptions where the loan can be given

• s.224(2) provides exceptions where a company can provide a loan, guarantee or security to
such a director:

(a) If the company is an exempt private company

(b) If the purpose of the loan is to provide such a director with funds to meet expenditure
incurred or to be incurred by him for the purpose of the company or for the purpose of
enabling him to properly perform his duties as an officer of the company.

(c) If the purpose of the loan is to provide a director with funds to meet expenditure
incurred or to be incurred by him in purchasing or otherwise acquiring a home.

The director must be engaged in the full-time employment of the company or its holding
company.

(d) If the loan is in accordance with a scheme for the making of loans to employees.

The director must be engaged in the full-time employment of the company or its holding
company.

The scheme must have been approved by the members at its general meeting.

*If the scheme has not been approved yet, the authorisation may be given within six (6)
months from the transaction or by the next following annual general meeting. – s.224(4)

• s.224(3): If the purpose of the loan is to provide a director with funds to meet expenditure
for performing his duties or to purchase a home, the condition is that prior approval of the
members is required. The members must be informed of the purpose of the expenditure
and the amount of the financing.

If no prior approval, ratification is required:

• s.224(4): If the loan, guarantee or security was given without first getting the members’
approval, the transaction must be ratified by the members:(Co authorize making of
loan/entering into any guarantee/provide any security)

• In case of a private company, within six (6) months from the giving of loan,
guarantee or security. s.224(4)(b)

If no prior approval or ratification of members:

• s.224(5): If no prior approval or ratification of the members are obtained, the loan shall be
repaid by the director or the Company shall discharge its liability under the
guarantee/security:

• In case of a private company, after 12 months from the giving of the


guarantee/security. s.224(5)(b).

Consequences of breach of s.224:

• The consequences are:

• s.224(6): Directors who authorise the making of the loan, guarantee or security
transaction in contravention of s.224 shall be jointly and severally liable to indemnify
the company against any loss incurred. This is limited to situations where
s.224(2)(b) or (c) applies.

• s. 224(7) – The company may recover from the director the amount of any loan or
the amount for which it becomes liable in respect of any guarantee or security given
contrary to s.224.

• A third party which has provided the loan can still sue the Company to make it
liable under the guarantee or to enforce the property charged. Co-operative Central
Bank Ltd v Feyen Development S/B [1995] 3 MLJ 313.

• s.224(10): any director who authorises the making of the loan, guarantee or
security transaction contrary to s.224 shall be guilty of an offence. Penalty:
Imprisonment not exceeding 5 years or fine not exceeding RM3 million or both.

Applying s.224(1) to the facts:

• The proposal in this case is for Badrul to take loan from Bank Antara and for Co to give
security (“the Sungai Pendek land”) to Bank Antara.

• Sinar Jaya is prohibited by s.224(1) because it is not allowed to give loan to director and it
is not allowed to give any security in connection with loan to director.

Applying the exceptions under s.224(2):


• Sinar Jaya is not an exempt private company because it has a corporate shareholder,
Sepakat. (an exempt private company can only have individual shareholders.)
• The purpose of the loan is not to provide funds to meet expenditure for the purpose of
the company or to enable Badrul to properly to perform his duties as an officer.

• The purpose of the loan is to provide funds to meet expenditure to purchase a home.

• Badrul is non-executive director, whom Is not engaged in the full-time employment of


Sinar Jaya.

• The fact indicate that Sinar Jaya did not have any employee loan scheme for the benefit of
its employees or directors.

• Even if there is, Badrul would not qualify. Because such scheme normally/usually for
directors or employees who are engaged in full-time employment.

• There is nothing on the facts to indicate that Badrul comes within any of the exceptions
under s.224(2).

• Therefore, there will be a breach of s.224 if this proposal is implemented.

***if Badrul take loan, no approval, no ratification, and no pay back/not yet repaid the loan,
“since loan taken without prior approval and ratification of members, there will be a breach
of s.224”. no need write “if this proposal is implemented” bcs loan alr taken, proposal is loan
haven’t taken.

Applying the consequences of breach:

• Sinar Jaya and its directors should not proceed with this proposal.

• Explain the consequences of the contravention as follows:

• Apply s.224(6), (7), Co-operative Central Bank Ltd v Feyen Development S/B [1995] and
s.224(10) - mention the company, Badrul or directors’ names where necessary.

• s.224(6): Directors(entire BOD) who authorise the making of the loan, guarantee
or security transaction in contravention of s.224 shall be jointly and severally liable
to indemnify the company against any loss incurred. This is limited to situations
where s.224(2)(b) or (c) applies.

• s. 224(7) – The company may recover from the director, Badrul the amount of any
loan or the amount for which it becomes liable in respect of any guarantee or
security given contrary to s.224.

• A third party, Bank Antara, which has provided the loan can still sue the Company
to make it liable under the guarantee or to enforce the property charged. Co-
operative Central Bank Ltd v Feyen Development S/B [1995] 3 MLJ 313.

• s.224(10): any director who authorises the making of the loan, guarantee or
security transaction contrary to s.224 shall be guilty of an offence. Penalty:
Imprisonment not exceeding 5 years or fine not exceeding RM3 million or both.
DISCUSSION ON FINANCIAL ASSISTANCE TO A PERSON CONNECTED

Introduction

• The question requires a discussion on the prohibition under the Companies Act 2016 in
relation to a company providing financial assistance to a person connected to a director and
the consequences of breach.

Explanation on Section 225 Companies Act 2016

• Under section 225(1) Companies Act 2016, a company shall not:

(a) make a loan to any person connected with a director of the company or its holding

company;

(b) enter into any guarantee or provide any security in connection with a loan made to such

person by any other person (e.g. a bank)

Person Connected

• Section 197(1) provides that a “person connected” is:

(a) a member of that director’s family;

(b) a body corporate which is associated with that director.

(c) a trustee of a trust (other than a trustee for an employee share scheme or pension
scheme) under which that director or a member of his family is a beneficiary; or

(d) a partner of that director; or a partner of a person connected with that director.

Under s. 197(2)(a), a member of director’s family, as defined in “shall include spouse,


parent, child (including adopted and step-child), brother, sister and the spouse of his child,

brother or sister”.

*No s.197(2)(b) bcs no body corporate associated with a director(20%), not apply

Exceptions where the loan can be given

• s.225(2) provides exceptions where a company can provide a loan, guarantee or security to
a person connected:

1. If the company is an exempt private company – s.225(1)

2. If the loan is made to a related company or the guarantee/security is provided in relation


to a loan to a related company. - s.225(2)(a)

3. If the company’s ordinary business includes the lending of money or the giving of
guarantees in connection with loans made by other persons (e.g. a Bank).

The activities of that company must be regulated by any written law relating to banking,
insurance or takaful or are subject to supervision by Bank Negara. - s.225(2)(b)

4. If the loan is made to a person connected with a director who is engaged in the full-time
employment of the company/related company. - s.225(2)(c)
The loan is for the purpose of meeting the expenditure incurred or to be incurred by him in
purchasing or otherwise acquiring a home. - s.225(2)(c)(i)

The giving of loan, guarantee or security needs not be approved by the members.

5. If the loan is made to a person connected with a director who is engaged in the full-time
employment of the company/related company - s.225(2)(c) in accordance with a scheme for
the making of loans to employees approved by the company. - s.225(2)(c)(ii)

The scheme must have been approved by the members.

Consequences of breach of s.225

• Consequences of breach of s.225:

• s. 225(3) – The company or any person may recover the amount of any loan or the
amount for which it becomes liable in respect of any guarantee or security given
contrary to s.225.

• A third party which has provided the loan can still sue the Company to make it
liable under the guarantee or to enforce the property charged. Co-operative Central
Bank Ltd v Feyen Development S/B [1995] 3 MLJ 313.

• s.225(4): any director who authorises the making of the loan, guarantee or security
transaction contrary to s.225 shall be guilty of an offence. Penalty: Imprisonment
not exceeding 5 years or fine not exceeding RM3 million or both.

Applying s.225(1) to the facts:

• The proposal is for Fatimah to take loan from Bank Baru and for Co to give “the Sungai
Pendek land”, as security to Bank Baru.

• Fatimah is Badrul’s wife. She is a member of Badrul’s family, therefore, she is a person
connected to non-executive director.

• Sinar Jaya is prohibited by s.225(1) because it is not allowed to give loan to person
connected to director and it is not allowed to give any security in connection with loan to
person connected to director.

Applying the exceptions under s.225(2):

• Sinar Jaya is not an exempt private company because it has a corporate shareholder,
Sepakat. (an exempt private company can only have individual shareholders.)
• The security is not provided in relation to a loan to a related company.

• Sinar Jaya’s ordinary business is to sell household items. It is not lending of money or
giving of security.

• The purpose of the loan is not to provide funds to meet expenditure to purchase a home.

• Badrul is non-executive director, whom Is not engaged in the full-time employment of


Sinar Jaya.

• The fact indicate that Sinar Jaya did not have any employee loan scheme for the benefit of
its employees or directors.
• Even if there is, Badrul would not qualify. Because such scheme normally/usually for
directors or employees who are engaged in full-time employment.

• There is nothing on the facts to indicate that Fatimah and Badrul comes within any of the
exceptions under s.225(2).

• Therefore, there will be a breach of s.225 if this proposal is implemented.

Applying the consequences of breach:

• Sinar Jaya and its directors should not proceed with this proposal.

• Explain the consequences of the contravention as follows:

• Apply s.225(3), Co-operative Central Bank Ltd v Feyen Development S/B [1995] and
s.225(4) - mention the company, Badrul, Fatimah or directors’ names where necessary.

• s. 225(3) – The company or any person, Fatimah may recover the amount of any
loan or the amount for which it becomes liable in respect of any guarantee or
security given contrary to s.225.

• A third party, Bank Baru which has provided the loan can still sue the Company to
make it liable under the guarantee or to enforce the property charged. Co-operative
Central Bank Ltd v Feyen Development S/B [1995] 3 MLJ 313.

• s.225(4): any director(entire BOD) who authorises the making of the loan,
guarantee or security transaction contrary to s.225 shall be guilty of an offence.
Penalty: Imprisonment not exceeding 5 years or fine not exceeding RM3 million or
both.
3. Syarikat Queen Linens Sdn Bhd

Note:

• In most previous exam papers, only one or two situations will come out, e.g. (a), (b) or
(c).

• The tutorial question is to provide training to students to answer questions on s.214, 215
and 216.

(a) Should the board rely and act on the feasibility report prepared by Cheng, a business
consultant engaged by Lily? Give your reasons.

Introduction

The question requires a discussion on:

• Whether directors may rely on information prepared and supplied by third parties in the
course of exercising their duties.

Explanation on directors’ duty of skill, care and reasonable diligence

• s.213(2) CA 2016 provides that a director of a company shall exercise reasonable care, skill
and diligence with

(a) the knowledge, skill and experience which may reasonably be expected of a director
having the same responsibilities; and

(b) any additional knowledge, skill and experience which the director in fact has.

Explanation on directors’ reliance on information prepared by others

• When exercising their duties, directors may have to rely on information provided by a third
party.

• s.215(1) – Directors have to rely on information, professional or expert advice, opinions


reports or statements (including financial statements and other financial data) (category of
information) prepared by (category of people):

(a) any officer of the company whom the director believes on reasonable grounds to be
reliable and competent on the matters concerned;

(b) as to matters involving skills or expertise, any other person retained by the company in
relation to matters that the director believes on reasonable grounds to be within the
person’s professional or expert competence;

(c) another director in relation to matters within the director’s authority; or

(d) any committee to the board of directors on which the director, whom is not a member,
did not serve in relation to matters within the committee’s authority.

• s.215(2) - director's reliance made under s.215(1) is deemed to be made on reasonable


grounds if it was made:

(a) in good faith; and


(b) after making an independent assessment of the information or advice, opinions, reports
or statements, including financial statements and other financial data, having regard to the
director’s knowledge of the company and the complexity of the structure and operation of
the company.

Application to the facts

• On the facts, Lily had engaged Cheng, a business consultant, to prepare a report on the
feasibility of the proposed new business.

• Cheng did not fall within the categories of persons stated in s.215. because although
Cheng is an expert, however he was not retained/engaged by the company(BOD).

• The further requirements under s.215(2) that the board must fulfil are:

director's reliance made under s.215(1) is deemed to be made on reasonable grounds if it


was made:

(a) in good faith; and

(b) after making an independent assessment of the information or advice, opinions, reports
or statements, including financial statements and other financial data, having regard to the
director’s knowledge of the company and the complexity of the structure and operation of
the company.

Conclusion

• In conclusion, the board cannot rely and instantly act on the report prepared by Cheng?

• They must do: appoint own consultant / verify with Cheng directly

(b) Meena stated that if the company were to incur losses from the new business, the
directors could be held liable for breach of duties under the Companies Act. Was she
correct?

Introduction

The question requires a discussion on:

• Whether directors are protected from liability for wrong business judgment or decisions
which causes loses to the company.

Explanation on directors’ duty of skill, care and reasonable diligence

• s.213(2) CA 2016 provides that a director of a company shall exercise reasonable care, skill
and diligence with

(a) the knowledge, skill and experience which may reasonably be expected of a director
having the same responsibilities; and

(b) any additional knowledge, skill and experience which the director in fact has.

Explanation on the business judgement rule


• Section 214(1) - A director who makes a business judgment is deemed to meet the
requirements of the duty under subsection 213(2) and the equivalent duties under the
common law and in equity if the director—

(a) makes the business judgment for a proper purpose and in good faith;

(b) does not have a material personal interest in the subject matter of the business
judgment;

(c) is informed about the subject matter of the business judgment to the extent the director
reasonably believes to be appropriate under the circumstances; and

(d) reasonably believes that the business judgment is in the best interest of the company.

• Section 214(2) - "business judgment" means any decision on whether or not to take action
in respect of a matter relevant to the business of the company.

• If all conditions are fulfilled, that directors who make business judgments may be
protected under s.214 from being liable for company losses if any of the business judgments
turned out to be wrong or should not have been made.

Application to the facts

• On the facts, the proposal was for the company diversity its business to include selling
furniture, home fittings and their accompanying accessories (“the new business”).

• This is because existing business was in selling beddings and linens, new business was
selling furniture, home fittings and their accompanying accessories
• The directors must meet the requirements of the duty under s.213(2) and s.214, when
deciding whether or not to venture into this new business.

• If they do not fulfill the above requirements, they will be sued subsequently for the losses
suffered by the company.

Conclusion

• Meena was correct to say that if the company were to incur losses from the new business,
the directors could be held liable for breach of duties?

(c) Meena also emphasized that the board would still remain responsible for Cheng’s
actions if it were to delegate tasks to Cheng. Was she correct?

Introduction

• The question requires a discussion on whether directors may delegate any power of the
board to an employee.

Explanation on directors’ duty of skill, care and reasonable diligence

• s.213(2) CA 2016 provides that a director of a company shall exercise reasonable care, skill
and diligence with

(a) the knowledge, skill and experience which may reasonably be expected of a director
having the same responsibilities; and
(b) any additional knowledge, skill and experience which the director in fact has.

Explanation on on directors’ delegation of duty

• s.216(1) - Except as is otherwise provided by this Act, the constitution or any resolution of
the Board or members of the company, the directors may delegate any power of the Board
to any committee of the Board, director, officer, employee, expert or any other person.

• s.216(2) - Where the directors have delegated any power, the directors are responsible for
the exercise of the power by the delegatee as if the power had been exercised by the
directors themselves.

• s.216(3) –directors are not responsible for the delegatee’s action if:

(a) the directors believed on reasonable grounds at all times that the delegatee would
exercise the power in conformity with the duties imposed on the directors under this Act
and the constitution of the company, if any; and

(b) the directors believed on reasonable grounds, in good faith and after making a proper
inquiry, if the circumstances indicated the need for the inquiry, that the delegatee was
reliable and competent in relation to the power delegated.

Application to the facts

• On the facts, it would be reasonable for the BOD to delegate tasks to Cheng. Because
Cheng is a business consultant, whom expert in business consultant’s job, and can prepare
a report on the feasibility of the proposed new business.

• There didn’t have any circumstances to indicate the need for inquiry. Cheng is a
independent business consultant, because there is no relationship between Lily(Director)
and Cheng

• So, the directors have reasonable grounds to believe that Cheng is reliable and
competent.

Conclusion

• Meena is correct to say that the board would still remain responsible for Cheng’s action.

• If the conditions under s.216(3) are fulfilled, then the board will not likely to be
responsible for Cheng’s action?

(Note: in some previous exam papers, there may be different facts given in a problem
question: The facts may show that the BOD delegates tasks to someone who has a
previous good track record, but he eventually made mistakes or he commits wrongdoing.
Hence, students need to apply these facts to conclude that there was no circumstances to
indicate the need for inquiry, in light of the person’s previous good track record, and
arguably, the BOD cannot reasonably foresee that the delegatee would make the mistake
or commit the wrongdoing)

(d) Assume the following different facts: If Queen Linens were to be a subsidiary of a
public company, discuss the directors’ responsibility for putting in place a system of
internal control.
• The issue is whether the directors of Queen Linens should assume responsibility for the
failure to have adequate system of internal control in the company.

• Explain Section 246 CA 2016.

• Section 246 (1) CA 2016 - The directors of a public company or a subsidiary of a public
company must ensure that Co has implemented a system of internal control. Such system
should provide a reasonable assurance that:

(a) the assets of the company are safeguarded against loss from unauthorized use or
disposition and to give a proper account of the assets; and

(b) all transactions are properly authorized and that the transactions are recorded as
necessary to enable the preparation of true and fair view of the financial statements of the
company.

• Section 246 (2) - Any director who contravenes this section commits an offence and shall,
on conviction, be liable to imprisonment for a term not exceeding three years or a fine not
exceeding RM1 million or both.

• On the facts, the directors held a board meeting to review its internal control and
external operations.

• Since the fact did not further indicate the internal control of Queen Linens, it can be
assumed that they have a proper system of internal control in the Co, and the Board met up
to the standard of care required of it.

• The company is reviewing their internal control, so from the facts the company has an
internal control and has reviews to improve it.

• In conclusion, the directors of Queen Linens have responsibility under s.246 to have a
proper system of internal control in the Co, and the Board met up to the standard of care
required of it, if Queen Linens were to be a subsidiary of a public company.

(Note: in some previous exam papers, there may be different facts given in a problem
question: The facts may show that the Company suffers massive losses owing to lack of
internal control. E.g. lack of supervision of its executives and employees. Hence, students
need to apply these facts to conclude that the BOD has failed to meet up to the standard
of care required of it, i.e. to have a proper system of internal control for itself.)